Sep 11, 2012, 05.59 PM IST | Source: CNBC-TV18

Govt's SEB loan restructure plan short-term solution: S&P

In an interview to CNBC-TV18 Allan Redimerio of S&P Ratings Services pointed out that Indian government’s current proposal for restructuring state electricity board (SEB) debt is a step in the right direction; however it is a short-term solution.

In an interview to CNBC-TV18 Allan Redimerio of S&P Ratings Services pointed out that Indian government’s current proposal for restructuring state electricity board (SEB) debt is a step in the right direction; however it is a short-term solution .

"We believe it is a short-term solution because the major impact is on the liquidity of the state owned distribution companies in India, but it doesn’t really address the long-term problem, which are tariffs," he explained.

India needs a very transparent tariff framework where tariffs are linked to costs and are adjusted regularly.

The transmission and distribution losses in India are one of the highest in the world. "It is averaging about 30%. Power is not being transmitted properly which is getting lost in the system. Greater investment and upgrading of the system will reduce these losses going forward and also increase the revenues of state distribution companies," he suggested. 

According to Redimerio, sustained credit profile of DISSCOMs and larger investment in the systems are long-term solutions to India’s problem.

Below is the edited transcript of Redimerio’s interview with CNBC-TV18.

Q: What are your thoughts on the government’s power sector debt restructuring proposal? Why do you think it will only provide short-term relief?

A: We believe it is a short-term solution because the major impact is on the liquidity of the state owned distribution companies in India, but it doesn’t really address the long-term problem, which are tariffs. What you really need is very transparent tariff framework where there is a regular adjustment in tariffs, which is linked to the costs.

Just to give some data, our associates in India, Crisil did some study on this which in 2005, 2010 the GDP per capita of India rose by about 13-14% per annum. Household expenditure in India rose by about 10-11% per annum.

However, power tariffs only increased by 5%. If you look at that then the first response would be that Indian people have the capacity to pay for more power tariffs. Secondly, the pace of tariff growth has not kept in pace with household expenditure and inflation levels in India.

If you look at the average technical and commercial losses for power system in India it is still one of the highest in the world. It is averaging about 30%. Power is not being transmitted properly which is lost in the system and greater investment and upgrading of the system will reduce these losses going forward and also increase the revenues of state distribution companies.

We feel that sustained credit profile of the DISSCOM companies and also larger investment in the systems will be the long-term solution to India’s problem. So what is being proposed right now we believe is a short-term solution, it is the right direction, the right step. However we believe more can be done to provide a long-term solution.

Q: NTPC data suggests the PF went down month on month despite some improvement in Coal India’s production. All this talk of Coal supply being limited because of the mess here, do you think that itself opens up a new chapter, away from whatever the existing restructuring maybe done, there could be newer accounts which could open up to these problems related to coal?

A: If you look at the coal sector in India, in the last three-four years the domestic coal production has been pretty much stagnant. It has been flat in terms of growth. Over the last two years, if you look their incremental demand for power what sort of fuel that it is covering that incremental demand for power has been coming a lot from imported coal.

Imported coal now accounts for about 20% of the total power contributed to India. There are lots of things to be done in the domestic coal sector in India. It has to do with more regulatory reforms such as land rights clearances need to be more efficient. Also, there has to be more transparent way of accounting for coal production in India to be able to solve the problems there.

Q: How worried are you about the rising non-performing power assets to be a risk for Indian banking system and you have highlighted in your note that about 11% of the Indian bank loans to the power sector were restructured in the last fiscal, have you done an assessment how much that figure could be in this year?

A: No we haven’t done figure for this year. We are aware that some states have already restructured those debts. But the question comes back to my first point the tariffs have been increased in some states are still not sufficient to meet the operating costs of DISSCOMs. So, there is still more to be done to increase the tariffs to be able to cover the costs.

Q: When you had your interaction with a couple of power utilities, have you got any indication of how from here on the tariff increase could be like?

A: There is no indication given to us by the power companies at this stage.

READ MORE ON  coal, power, SEB, S&P Ratings

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